State-owned VTB, Russian’s second-largest banking group, will cease service to Russia-based US clients to avoid falling foul of Foreign Account Tax Compliance Act (FATCA), a US tax avoidance law that comes into force on July 1. According to Garegin Tosunyan, the head of the Association of Russian Banks, Russian law and FATCA are incompatible because Russian banks will be able to comply with US law or Russian law, but not both.

About 77,000 banks outside the US have registered with the IRS, among them 515 Russian banks, including market leaders Sberbank and VTB. However, registration does not solve the problem because current Russian law bars banks from sharing information and withholding taxes for other countries. Talks with the US government have also broken down although one packet of amendments addressing FATCA has been fast-forwarded through parliament that will partially address the issues and also give banks the right to refuse to service Americans.

Thus, VTB’s 2,000 US clients based in Russia will be unloaded and other Russian banks may do the same.

Tosunyan commented that if US citizens do not like it, they can take their complaints to the US government, saying: “The situation is ridiculous, but Russia is not to blame.” He added that Russian banks will cope more easily with the loss of US clients than US clients will without Russian banking services.